The pension freedoms introduced in April 2015 have given DB members unprecedented levels of choice in deciding how to shape and provide for their retirement. As the cost of running DB pension schemes continues to rise, many leading companies are choosing to actively manage the promises made to former employees.
Accelerating the settlement of your DB pension liabilities
For a typical DB scheme, a material number of members will retire over the next decade. George Osborne’s “freedom and choice” changes introduced in April 2015 offer an opportunity for companies to accelerate the settlement of your pension liabilities by offering members (from age 55) the option at retirement to transfer out to a DC scheme, in order to access the new pension freedoms.
The opportunity to transfer out, or just re-shape benefits within a scheme, will be attractive for a range of members: for higher income members who could benefit from tax advantages of a drawdown environment, to lower income members where the option of a large one-off cash sum will be relatively attractive compared with a modest monthly pension.
Members must be made aware of the pros and cons of giving up a DB pension so that they can make a decision that suits their needs. Indeed it is a legal requirement for members with pots above £30,000 to take regulated financial advice.
Provided that the terms are sufficiently attractive, and members are supported and informed in their decision making, we believe that the option to draw a material lump sum will be attractive, relative to drawing a pension, for a substantial minority of members. Experience of at-retirement options across the industry suggests that take up rates are typically in the region of 20% to 40%. This provides companies with the possibility of substantial savings over time.
Managing the rising cost and volatility of your DB scheme, whilst ensuring members make appropriate retirement choices after the April 2015 freedoms.
Our advice helps our clients support their members to make the right decisions, whilst reducing the size of their DB scheme at an attractive price, reducing both risk exposure and cash calls on the company.
Guiding TRW Pension Scheme on UK’s largest ever pension buy-out
Hymans Robertson acted as lead actuaries and investment consultants to the trustee of the TRW Pension Scheme in settling more than £2.5bn of liabilities, removing corresponding risk as part of a broad de-risking strategy. This included the partial buy-out with Legal & General, the largest ever pension buy-out in the UK and the most innovative arrangement of its kind.
Both the trustee and sponsor agreed on the strategic objective of reducing the size of the Scheme relative to the size of the direct UK sponsor, while assuring members of the best possible outcome.
In 2014, the Scheme settled more than £2.5bn of its liabilities relating to more than 30,000 members.
Liabilities were settled through pension increase exchange offers, enhanced transfer value offers, winding-up lump sums and partial pensioner buy-out. Alongside this, the Trustee and Company took the opportunity to materially reduce risks for the remaining 15,000 scheme members
The outcome was a huge success, with the Scheme transferring around 78% of its liabilities for 30,000 members. The trustees valued member confidence in the security of an assured annuity through the insurer. From the sponsor’s viewpoint, transferring liabilities to L&G improved the company’s balance sheet.